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Automated Vehicles Are Driving Change in the Insurance Industry

By Jonathan Charak, FCAS, MAAA, Assistant Vice President and Actuary, Zurich. Vice Chair of the Casualty Actuarial Society's Automated Vehicles Task Force

Jonathan Charak, FCAS, MAAA, Assistant Vice President and Actuary, Zurich. Vice Chair of the Casualty Actuarial Society's Automated Vehicles Task Force

The insurance industry is currently undergoing an incredible amount of change, driven by the blistering pace of technological advancements. Automated vehicles are one technology that has the potential to fundamentally change the world’s economy and, therefore, the insurance industry. The impact on insurance will be felt in multiple ways. Some include: a yet-to-be-determined liability system; and adaption of current insurance pricing models.

The Casualty Actuarial Society’s Automated Vehicle Task Force (CAS AVTF) addressed these issues in a research report, “Automated Vehicles and the Insurance Industry—A Pathway to Safety: The Case for Collaboration.”

Ultimately, a new liability system will be determined by the various legislative bodies that govern us. There are arguments for personal auto to remain as auto liability coverage, but will the courts agree? Especially if you contend that the “driver” is not actually driving the vehicle. It will be imperative for insurance professionals to understand the potential implications of an auto liability system compared to a products liability and even a cyber liability system. Each of these will have different capital requirements, profit provisions, claim handling expenses (with the potential for larger defense costs for products liability, which could trigger recalls), and overall pricing models.

“The insurance industry is currently undergoing an incredible amount of change, driven by the blistering pace of technological advancements”

Once a liability system is determined, we will need to know how to price these risks. A significant part of a pricing model is the credibility formula, which ultimately tells the actuaries how much they can trust the data in comparison to ballast (e.g., countrywide average). This will create a formula that allows insurance companies to provide discounts for safer risks. We know that as losses decrease in aggregate, premiums will eventually follow. The CAS AVTF analysis indicates that insurers’ pricing models may take a long time to recognize the new paradigm of a lower loss environment.

The analysis includes assumptions about the rate of adoption of automated vehicle technology and the ability of auto insurers to spot the presence of loss-reducing features. If more drivers adopt the technology, there will be a larger sample and, therefore, an ability to increase credibility (and the potential discount).

Further, insurers need to be able to identify the options in a vehicle that automate the vehicle functions. Currently, there is no way to do this. The insurance industry, vehicle manufacturers, and the public would all benefit if insurers have a way to clearly identify the technology in vehicles and analyze robust datasets of automated vehicles. A cooperative atmosphere would allow the safest technology to be insured for the fairest price.

There are a plethora of other considerations that an insurance company must address with automated vehicles. Some include:

• Are your systems capable of handling the increased data?
• Are automated vehicles within your company’s risk appetite?
• How will you address potential cyber liability or will your company look to exclude it?
• Do you think that car sharing and other sharing economy models will overtake traditional car ownership models?

None of these questions can be answered in a silo. The best way to address this is at a company level. Collaboration between underwriters, actuaries, lawyers, IT, claims, and other insurance professionals is the only way to assess appetite and create a go-forward strategy.

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